The Free Market vs. Subsidies

[soliloquy76.livejournal.com]

This started out as sort of a thought dump in my journal, but a fetching young lass convinced me to post it here as well. Pardon any lack of cohesion.

I've been thinking about the free market and how that could work (or not) in the United States in a global economy. First, I should disclose that I'm by no means an expert in economics. Second, let's define some terms. A free market is defined as:

An economic system in which prices are determined by unrestricted competition between privately owned businesses.

This is the foundation of the Austrian school of economics pushed by libertarians and some conservative-types. The global economy can be defined as:

The international spread of capitalism, especially in recent decades, across national boundaries and with minimal restrictions by governments.

As we all know, we currently live in a global economy where various level of the free market exist. Each country has their own regulations, wage and human rights laws, etc which ultimately determine the cost of goods and services from those countries. China, for example, is the fastest growing economy in the world because their human rights laws and wages are so poor that workers are a cheap commodity. It's why we're all able to afford PCs, iPods, LCD TVs, etc. It's also why manufacturing in the United States is virtually nonexistent and (arguably) why we're seeing such high unemployment as jobs are outsourced to countries like China, India, and Mexico.

So how does the United States compete and get those jobs back? In a free(r) market, we would have to reach parity (or come close to) with the lowest common denominator. American workers would have to be competitive with Chinese workers, for example. Our quality of life would necessarily suffer. Is this something free market proponents accept, and by accepting this reality, advocate?

What got me thinking about this was my recent purchase of a Chevy Volt. For those who don't know, it's a Plug-in Hybrid Electric Vehicle (PHEV) produced by GM. GM, of course, was saved by the federal government in 2009 because of the credit crisis of 2008 and the subsequent recession. If GM hadn't been saved, not only would millions of jobs have been affected or lost, the Volt would have never seen the light of day and the US would be considerably behind the curve in development of next-generation vehicles. Japan already has the Prius (with a new PHEV variant), and the Leaf which is totally electric.

Now I was on board with the "end government subsidies" crowd not too long ago, but in conversations with some rather rabid anti-government conservatives, it got me thinking that not only are government subsidies not always a bad thing, they're necessary if the United States is to compete with the rest of the world. Every auto-producing nation in the world receives some sort of government subsidy, including Japan. By removing ours, we're effectively killing that industry in the United States.

My question for the free market advocates out there is that, given the global market we're in where other countries are subsidizing their industries, how do we reconcile not doing so domestically to remain competitive? I realize this is an oversimplification of a complicated issue, and like I said, I'm not an economics expert. Hopefully any free market advocates in here can set me straight.

Comments

[a-new-machine.livejournal.com]

Actually, this has a bunch of different factors missing. For instance, American workers are among the most productive per wage-hour in the world. So we don't have to "race to the bottom." Instead, we can offer a better product (harder-working, more productive, better-trained employees) at a higher price. Then China gets to be the Geo Metro of the labor market, and we get to be the Mercedes-Benz. The idea that there is no differentiation in the product (the labor) being sold is one of the key problems with the "race-to-the-bottom" model.

[blue-mangos.livejournal.com]

lol, I think she meant somewhere else. But we'll take it ;o)

[soliloquy76.livejournal.com]

That's why I hesitated on posting this so soon. It's an oversimplification, sure, but overall we are not competitive with China. If we were more productive, meaning we crank out more widgets per dollar, at what point does it even out? China is still a better value or so many jobs wouldn't have been moved there.

[a-new-machine.livejournal.com]

Well, their wages are rising as their cost and standard of living rise and China slowly allows the RMB to float up towards its actual value. Obama mentioned in his Zakaria interview that he had just had a conference with businesses that had been priced out of the Chinese labor market and were returning to the US.

[soliloquy76.livejournal.com]

Hence subsidies are good.

Not good, but necessary to compete. Granted, I don't have the numbers to compare domestic vs foreign productivity, overhead costs, purchasing power, etc.

GM's resources would have been bought and used in something else - that labor would have been used elsewhere.

This seems like a huge assumption. Given our current state of unemployment, I'm not buying it.

When you have a subsidy on something, you're admitting that other people don't value it enough.

Not necessarily. We subsidize the oil and farming industries (presumably to keep costs down). On a global scale, how can we compete when other countries are also subsidizing their industries?

[underlankers.livejournal.com]

The irony of the laissez-faire system is that in practice it will every single time lead to unfree markets dominated by giant conglomerates which are better-suited to merge with all their rivals, as given complete freedom to rule the market more wealthy and powerful corporations simply rig the system in their favor, destroy small businesses with impunity, and in the most exaggerated cases become quasi-governments in their own right (see: all proprietor-colonies of which the British East India Company and the United Fruit Company are the most notorious examples). The reason for this is of course that without any means to limit the pernicious effects of inequality inequality translates into the needs of the few outweighing any influence by the many.

But mention this fact to libertarians......

[underlankers.livejournal.com]

The other side of why they're more prosperous is that having more laborers and undemocratic societies means that corporations are free to kill their workers for more profits with the consent of the government knowing that if there are 1 billion people under the rule of a state the supply of workers will be inexhaustible. The other *other* side of it is that China traditionally is an economic powerhouse, it stopped being one from civil war and invasion, its recovery was to be expected short of more civil war and invasion. The other other *other* side is that the CCP is respected for having made deliberate efforts to rehabilitate and to expand areas of China's government neglected by prior regimes and for keeping the boundaries of China at the second-largest they've ever been in totality, not for creating prosperity in itself.

[underlankers.livejournal.com]

Resources do sit idle in every situation where even if they exist they cannot be adequately exploited. Hydrogen as an energy source would be far superior to petroleum but the engineering to do that doesn't really exist in any feasible, safe fashion so it's not used. See the difference between *potential* resources and what's *actually* there? By this argument the history of the modern world should have been the clash of the Russian and Brazilian superpowers for global hegemony.

[enders-shadow.livejournal.com]

"The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups."

Yes, of course. That is why the workers revolution, must be a global revolution.

[underlankers.livejournal.com]

And then the workers' revolution happens in a country where the workers are farmers. Oops.

[enders-shadow.livejournal.com]

You don't understand the meaning of the word "global" do you?

[underlankers.livejournal.com]

I sure do, but how did attempting to create it work every single time it was tried?

[enders-shadow.livejournal.com]

Point out to me where I said it worked any of the times it was tried?
You have an understanding problem.

[enders-shadow.livejournal.com]

The economics lesson there is implied globalism.
Which I'm fine with. National boundaries are mass delusions anyway.

[enders-shadow.livejournal.com]

Ok Bruce. What's confusing?

[enders-shadow.livejournal.com]

lol

Cosmopolitanism.
I'm a citizen of the universe.

[a-new-machine.livejournal.com]

There's another related question. Now, we saw with Solyndra that a company that should have died in its crib became pretty big, and remained so inefficient that it couldn't prosper without subsidization. How many companies are there, though, that receive subsidies, and that's the *only* thing making them viable? I'm not sure. I'd wager that without the lax private property enforcement (or outright corrupt seizure), currency manipulation, and direct cash subsidies, a large chunk of China's businesses wouldn't continue to operate in the black. That means that their businesses aren't going through the normal weeding out done by normal market forces. How much inefficiency are they allowing to continue? At what point do the benefits of the free market (specifically in making companies produce better products for less money to capture share of a competitive market) outweigh the negatives of not having subsidies? Isn't that a sort of benefit in itself of *not* having subsidies? One wonders how much it's actually worth, though.

[underlankers.livejournal.com]

You said the Worker's Revolution must be global. I'm just bringing up reality in a discussion on theory.

[enders-shadow.livejournal.com]

Globalism: the attitude or policy of placing the interests of the entire world above those of individual nations.

"The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups."

You cannot leave anyone, or any group, out.
It doesn't matter where the group of people are on the planet, you must consider them.

[enders-shadow.livejournal.com]

That's nice dear.
Apples and Oranges aren't the same thing.

[underlankers.livejournal.com]

Yeah, except where there is no government there is also no capitalism, instead there's noble landowners oppressing serfs whose misery is overlooked by everybody. The existence of government and capitalism go hand in hand, but I don't expect that such mundane reality would mean much as it is because there's never any level of government's existence not considered repressive. Even the old South where the government didn't exist outside the post-office is too controlling for libertarians, as opposed to anarcho-capitalists, given the immense number of arguments I've seen where the sharecropping economy bereft of a working class as sociologists consider the term and a very narrow government in terms of economic action (narrow in fact meaning non-existent) is too much government.

[underlankers.livejournal.com]

That having resources means jack-shit unless there's the ability to use them, which in a world of reality as opposed to theory does not always exist.

[underlankers.livejournal.com]

Indeed, and the Worker's Revolution doesn't work in the real world because humans don't think on economics alone, whether we're talking Marxism or libertarianism. Same melody in the argument, different tune.

[underlankers.livejournal.com]

Yes, I'm sure I am. It's why in my contact I have yet to see libertarians define an optimum level of government influence for a mutual discussion, preferring instead to say what they would not as opposed to what they would. It's very Cromwellian.

[soliloquy76.livejournal.com]

Solyndra received a government loan, though, right? Does that really count as a subsidy?

As to the rest of your comment, the same question applies: how do we compete with a country that engages in this type of behavior? Market forces work fine at weeding out poorly performing countries that play by our rules. China doesn't play by our rules. In fact, it seems to use them against us.